Monday, July 14, 2008

Monday, July 14: The First Day of the Rest of Our Economy

Mission Accomplished:
We are now in the worst economy since the Great Depression. The Bottom is nowhere in sight. We usually have just one Martini during cocktail hour. Tonight, 6:30pm, we're on our third. We're hoping three's a charm.



Banks Get Clobbered in Trading Today:


The Dow Jones Industrial Average ended down by 45.35 points at 11055.19, cut down by sharp declines in its banking components. Citigroup fell 6%, J.P. Morgan Chase dropped 4.4%, and Bank of America fell 7%. The S&P 500 [went] downward by a 4.9% slide in its financial sector. See the full story at the WSJ.

Soon after the Market closed this afternoon, NYTimes weighed in: "The Bush administration’s plan to help restore confidence in the mortgage finance giants, Fannie Mae and Freddie Mac, could not stop declines in the stocks of the two companies on Monday.

Shares in Freddie Mac closed down 8.2 percent to $7.11....Fannie shares were down 5 percent to $9.73.

Although [last night's] announcement may have been enough to spur a short-lived rally in the stock market, analysts say the plan was not much of a surprise.

“The market opened with a sigh of relief,” Arthur Hogan, an analyst at Jefferies & Company, said. “But upon reflection, we realized that the government’s plan doesn’t quell our concerns about the economy.”

“A rally based on nationalizing mortgage risk isn’t one that can really be sustained,” said Sean Ryan, an analyst at Sterne, Agee in New York.
To continue reading today's NYTimes stock coverage, click here.

The Bubble Blog wonders, Will WAMU be the next biggie to fail?

Meanwhile, back at the ranch--er, California--THE FDIC HAS HALTED MORTGAGE FORECLOSURES FOR FAILED GIANT INDYMAC. (Thanks here go to Calculated Risk.)

Additionally, while the default and foreclosure may be "low" in our own particular neck of the woods, we all know by now that this is a national problem that is impacting every single housing market.

And even when troubled borrowers get help,

Reworked Subprime Loans Default at `High' Rate, Moody's Says
By Jody Shenn

July 14 (Bloomberg) -- More than two of every five subprime borrowers whose mortgages were reworked in the first half of 2007 are defaulting anyway, Moody's Investors Service said.

Among subprime adjustable-rate mortgages modified in the first half of last year, 42 percent were at least 90 days late on March 31, the ratings firm said in a report today.

Modifying loans granted to consumers with poor credit records has gained favor as record numbers fail to keep up with payments and home prices tumble. Loans reworked more recently may perform better than ones modified in early 2007 because lenders are increasingly lowering interest rates and offering changes to consumers with fewer missed payments, Moody's said. That's different from 2007, when lenders focused on enforcing repayment plans.

7 comments:

Dave Phillips said...

Frankly, saying this is the worst economy since the great depression is a bit overstated. We still have positive GNP and may other things that make this much better than that economy. This is at least the worst mess the financial markets have been in since the S&L meltdown and arguably much "deeper." I hesitate to compare our modern economy to the great depression economy because so much has changed - FDIC to mention one.

What we need to resist is the over-reaction in terms of the "fixes" we come up with in congress. Some folks need to suffer because they took a fools chance at finding the gold. We must resist making everyone whole again and focus on the things that can be fixed to restore the system.

Matt S. said...

GDP is only positive because of inflation. Wage growth is negative after accounting for inflation.

GD's are about a lot more than bank runs. What has changed, for the worse, is that this time we have less commodity resources and manufacturing to pull us back up.

The combination of loss of equity, capital, and credit, and rising fuel/food prices is what is dragging us down.

This is just the beginning. Watch the layoffs and foreclosures continue to spiral, and consumer spending keep weakening.

Today's great ideas in the Senate? Paulson wants to buy GSE equities, and Senate wants to ban shorting of GSE's.

Brilliant.. Congress will do their part.. spend money and kill dollar.

Dave Phillips said...

Matt, thanks for correcting my spelling on GDP. Do you know what the GDP was doing in the quarters leading up to the great depression? My only point is that the economy today is WAY more complex than it was back then and to compare the two is misleading.

brooklyn bob said...

Dave,

I know it's your job to be an optimist...but there's never been an economy anything like this since the Depression. In this regard, it *is* the worst economy since the Depression. No one's saying we're *in* a Depression. For that matter, Bernanke can't even utter the word "Recession," because he's not only afraid of the word and the concept, but also because he's using the false measure of what actually 'makes' a recession, which is Two Quarters blah blah blah (the hindsight equation). 75% of economists, and this is a June polling, believe we've been in a recession for months. The general population believes it, too.

All this is splitting hairs.

There've been many recessions before, there's been the gas crisis in the 70's, there's been Stagflation, there's been the S and L crisis. But we've never been in an economy like this before, where the Federal Government, for God's Sake, is trying to nationalize two private gigantic corporations so that the United States economy doesn't fold in on itself like an origami bird, taking down several foreign economies simultaneously.

To call this the 'worst economy since the Great Depression' is actually an understatement.

It's the worst economy *ever.*

Dave Phillips said...

Bob,
I do not disagree with what you are saying. My ONLY point is that the Depression Economy and the current economy are not just apples and oranges, they are more like brussle sprouts and casteroil. Both are repulsive, but I object to using the imagry of the depression to paint today's economy. I also object when folks compare Charlottesville to Northern VA. It is just a bunch of retoric aimed at skewing the readers perception. If we want to draw comparisons, let's find another rotten apple to compare with or simply state that (in your opinion) this may be the worst economy we have ever had. That is more intellectually honest.

Also, I would be an optomist no matter what job I had. I hang out here on the Bobble Blog to give me a perspective that is foreign to my natural demeanor. I value what the half-empty crowd thinks because it challenges my beliefs and keeps me intellectually honest. I'm just trying to bring that same service to you guys.

Matt S. said...

Dave, the "imagery of the depression" is not a way to paint "today's economy", but rather scenarios of "tomorrow's economy."

One of the best traders in the world, Holocaust survivor George Soros, calls this the "worst situation in 75 years."

http://money.cnn.com/2008/05/12/pf/soros_interview.moneymag/index.htm?postversion=2008051404


This economy is not "different". It is the same economy, with capital, commodities, labor, assets and liabilities, bonds, equities, and taxes.

The only complexity is all the bullshit ponzi finance that allowed a declining debtor nation to front as a rich nation.

In fact, history is repeating itself, albeit with its own fresh flavor. You asked, "what the GDP was doing in the quarters leading up to the great depression?" The answer is, BUBBLING! That bubble was called the Roaring 20's.

http://en.wikipedia.org/wiki/Image:Gdp20-40.jpg


What is different now is that Americans have a higher debt-ratio and debt-service than ever in history. 1933 saw Americans fall into a negative savings rate, and now again in 2005.

http://www.thestreet.com/p/rmoney/marketanalysis/10293756.html


Please don't use that tidbit to say, "oh, like 1933? We must be near bottom then." There are commonalities but this is not identical to the GD. As Bob and I said previously there are factors that could make this one worse.

Another big factor is oil, which we had lots of in GD-I... mmm.. GD, but have little of now. Also seemingly unlimited land, forests, water, etc.

Other big factor is that we were a manufacturing and exporting country. Now most of the population are in expendable "service industries."

I'm an optimist too. I think our children can quickly learn to grow food, stitch clothing, walk, camp, squat, catch rainwater, forge metal, and many other useful skills not taught in public schools. :D

Maybe that's a huge exaggeration but I really can't tell at this point. All I know is that people who assume (insist) it is impossible are hugely ignorant of history, human nature, and economics.

matt s. said...

I see some url's got cut off. Here are tinyurl versions:

Soros - http://tinyurl.com/6zbc8h

Debt - http://tinyurl.com/5mvrk9